Posts Tagged ‘credit’

I came across the following extract from a BBC Online article. The writer, “Laura” works in a British commercial bank.

If what she says applies in places like S’pore, HK, USA etc, we could see a second dip soon. Note after the collapse of Lehman, int’l trade almost stopped for a few months because banks stopped accepting letters of credit from banks that they thought could collapse.

“I have had a growing worry over international finance over the last few months. Since the crunch started, confidence in other banks has been knocked. The most obvious manifestation of this was LIBOR being thrown out of kilter. Whilst this has now settled it only shows the picture of banks operating in the UK. What can’t be seen easily is the reduction or extinction of the willingness of banks to accept letters of credit from foreign banks which many customers who export or who have sister companies abroad need to trade round the world.

‘There are some countries now which have no banks which UK organisations are happy to accept a letter of credit from. Letters of credit are, in simplistic terms, one bank saying our customer is good for the money. This letter says we guarantee that so please let them have the goods and pay after delivery. If your customer then doesn’t pay you, their bank has to honour the letter of credit they approved. If your bank doesn’t have faith that they would honour that then the whole system falls down. Which it virtually has.

‘This situation hasn’t notably improved for some countries and I think this is a real threat to economic growth to UK Plc next year, as low exchange rates should mean good times for exporters. If they can’t get funding, however they won’t be able to capitalise on this.”

But banks that have global networks and strong franchises in trade financing like HSBC (I got shares here), Citi (after US government bailout) and Standard Chartered are minting money.

Part of a Reuters reporton John Paulson’s views. He is a billionaire hedge fund manager.

“Given his prescient bearish call on mortgage credits, Paulson’s views are widely watched for what he has in his $33 billion investment portfolio.

‘He highlighted the attractive yields on credit issued by GMAC due in Sept 2011, the former General Motors automotive financing company that the U.S. government propped up at the end of 2008.

‘By Paulson’s thinking, the government involvement is equivalent to an explicit guarantee on GMAC’s finances.

“So instead of buying (a) Treasury bond which yields 84 basis points, I can buy GMAC which is almost, I consider equivalent to a government bond and I can get 11 percent. That is why we have allocated so much money to this particular security,” he said.”